Buying Into Brownfields
Developers Are Rediscovering These Once-Overlooked Properties.
Redevelopment is a major thrust in the world of commercial real estate for many reasons. These include anti-growth policies, difficulties in locating suitable properties zoned for particular developments, and housing trends indicating that both young and older couples find cities more desirable places to live.
Due to these factors, owners of previously overlooked brownfield properties now have opportunities to re-enter the commercial real estate market and to derive fair value from their long-depressed holdings.
Brownfield redevelopment abounds today, as never before, because of several reasons. More than 300 local government jurisdictions have received federal support in the form of the U.S. Environmental Protection Agency's national Brownfields Pilot grant program. Moreover, accepted techniques for site investigation are available that, for the first time, inform brownfield property owners of the likely extent of environmental damage and the estimated cost to remediate their sites.
Finally, many state brownfield programs give potential brownfield purchasers and developers financial incentives and liability relief, enabling prospective purchasers to better balance the rewards and risks.
Commercial real estate professionals are in a good position to research, locate, and identify brownfield sites and link property owners with prospective redevelopers. Consulting with environmental professionals may be helpful to learn which properties are contaminated, to what degree, and how an environmental regulatory agency likely will view remediation alternatives.
Since 1995, the EPA has been providing cities, counties, and other local government units with pilot grants of $200,000 to help develop internal brownfield programs, which in turn have been useful in inventorying and assessing sites and stimulating private-sector investment.
The U.S. Senate recently passed a major federal brownfield initiative under Senate bill 350. The essence of the federal legislation is to separate brownfield cleanup from the Superfund program, now in its 21st year and largely bogged down in litigation and bureaucracy. The bill is now in the House of Representatives for consideration.
Federal legislation includes funding for site assessments over a five-year period and for state brownfield programs, reduction of the federal role in brownfield site cleanup, and a measure of finality for voluntary brownfield site cleanups conducted under state supervision.
Several issues can affect the ease with which brownfields can be remediated. These include the nature of future land use, as well as how redevelopment and cleanup can be factored together to reduce the risk of an environmental hazard, while at the same time reducing the scope and the cost of the cleanup
Engineering controls encapsulate or otherwise isolate on-site contaminants to protect against creating a health hazard to on-site users and to prohibit contamination from migrating off-site.
Also, institutional controls, including deed notices, deed restrictions, and ground water use restrictions, when applied, signal that the public is protected from the environmental hazards associated with the property, yet alerts future owners, contractors, and utility companies that a potential hazard exists.
Finally, risk-based cleanup standards have been developed for petroleum contamination from leaking underground storage tanks and soil and ground water contamination from chemical contaminants. The use of risk-based standards sometimes requires a more costly and time-consuming site investigation and risk assessment to justify less-stringent cleanup criteria.
A significant trend in cleanup and redevelopment is brownfield redevelopment companies that seek out contaminated sites and end users. Among such companies operating nationally are OENJ Corp., Cherokee Investment Partners, and Landbank. These companies usually are affiliated with either national engineering and remediation companies, developers, and/or insurance companies.
Brownfield redevelopers usually are very selective about the properties they acquire and devote considerable energy and resources on due diligence — the environmental background studies and site investigations necessary to develop an accurate picture of the nature, extent, and financial magnitude of the cleanup liability. Most brownfield redevelopers take the environmental liability from owners when they purchase properties, usually at a greatly discounted price. In most cases, redevelopers locate and contract with end users, so when the cleanup is complete they flip the properties and take the profit.
Many brownfield redevelopers use some form of insurance product, many of which have emerged in the marketplace within the past five years. Generally known as cost-cap insurance, the major carriers presently offering such coverage are AIG, Kemper Insurance, ECS, and Zurich Financial Services Group. After a property has undergone the environmental investigation necessary to develop a remedial action plan that will satisfy a state environmental regulatory agency, the insurer will provide cost-cap or similar policies that will insure against cleanup costs over and above some predetermined cost estimate plus a deductible. Many variations of such policies can be negotiated with the major providers at premiums ranging from 5 percent to 15 percent of the level of coverage.
Cleaning Up New Jersey
Three successful brownfield remediation projects in New Jersey show how the combined forces of redevelopers and end users can facilitate the cleanup and redevelopment process. Each case presents a different mix of environmental and regulatory issues and a different development challenge.
In the once-thriving industrial city of Trenton, the Roebling Steel complex is being rehabilitated in the form of office development, retail, and housing.
Occupying a dozen city blocks, the Roebling complex was once a wire manufacturing plant. Over the years, the city of Trenton and various private developers showed an interest in the different parcels that make up the complex. In most cases, the city took developable parcels in condemnation and then transferred them to private developers as plans materialized.
One major development within the Roebling complex is Pelletieri Homes, a subsidized seniors-housing development with approximately 120 units developed by Pennrose Properties after it acquired the property from the city of Trenton.
The environmental investigation of the property took approximately three years and dealt with metal contaminants in the soil, asbestos, and electrical transformers containing PCBs.
The actual remediation took place during the reconstruction phase of the project and included both the encapsulation of contaminants within the building and the repaving of the exterior area of the property for parking that also served to encapsulate soil contaminants. The cost of the cleanup was approximately $200,000.
Other completed developments within the Roebling complex include an office building for a state mortgage financing agency and a shopping center anchored by a supermarket. In general, the development and end-use issues have been more critical to the feasibility of the development than the cleanup issues. Other areas in the Roebling complex now are undergoing active environmental investigation and cleanup, much of it funded by the state of New Jersey.
In suburban Bridgewater Township, an 80-acre electronics manufacturing complex experienced a series of ownership changes, from RCA to General Electric to Harris Semiconductor Corp. Harris' long-term plan to reduce and then close the plant became the opportunity for a mixed-use development for Steiner Equities.
In this case, the cleanup was facilitated by the New Jersey Industrial Site Recovery Act that requires industrial properties to be cleaned up upon transfer of ownership.
Working cooperatively, GE, Harris, and Steiner are addressing environmental concerns. Petroleum-contaminated soil was excavated for off-site recycling and underground storage tanks were removed. Some industrial solvents in the ground water were addressed through ground water use restrictions that reclassify impacted areas as exceptions to the prevailing ground water quality standards; others are still under investigation. All of the buildings were demolished after asbestos was removed. Cleanup costs are expected to total several hundred thousand dollars.
The growing suburban region in west-central New Jersey makes the area highly attractive to such retail end-users as Wegmans Markets, Home Depot, and the Ruby Tuesday restaurant chain. Two years elapsed from the property acquisition to the opening of the first retail tenant; however, far longer time was spent upfront in due diligence and negotiation to make this deal a reality.
In urban Elizabeth, a Holiday Inn is being constructed at the site of an old asphalt shingle plant to serve the bustling Newark International Airport complex. New Jersey's many brownfield incentives, including remediation cost reimbursement and liability protection, as well as local property tax abatement, helped put this project over the top.
Prior to acquisition, the investment group that bought the property relied on their environmental consultants to define the character and extent of the environmental contamination and to develop a cost estimate for remediation. The costs were then factored into the purchase price in this as-is deal. To take advantage of state brownfield incentives, the cleanup used a memorandum of agreement between the buyer and the state as the regulatory implement as required under New Jersey's Voluntary Cleanup Program.
The cleanup, underway but not yet completed, is expected to cost $400,000, compared to a purchase price for the land of $1.2 million. Petroleum-contaminated soil was excavated for off-site recycling and underground storage tanks were removed. The site qualified for natural attenuation, which allows time and the natural biological organisms that exist in the ground to slowly degrade the contaminants to a level of acceptable ground water quality. After asbestos removal, all of the buildings were demolished.
Finding Brownfield Opportunities
Many efforts are being made to identify and inventory brownfield properties. Municipal brownfield agencies are funding the development and publication of brownfield inventories, and Web sites have been developed to publicize brownfields and to make the identity of available sites known.
Given the current trends in brownfield programs and cleanups, an exciting future can be forecast for this emerging commercial real estate field. Relating brownfield restoration to smart-growth concepts gives the private sector an opportunity to find brownfield sites at discounted prices and to restore and redevelop them into end uses that communities view as assets.